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Federal Reserve officials indicated that the US central bank will have to take a “careful approach” in cutting interest rates further due to the rising risk that inflation will remain persistently higher than its 2 per cent target.
In minutes from the December Fed meeting released on Wednesday, officials noted the elevated policy uncertainty as Donald Trump’s second presidency is set to begin, and indicated that the pace of rate cuts could start to slow or even pause.
“Participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” the minutes said.
“Most participants remarked that, with the stance of monetary policy now significantly less restrictive, the committee could take a careful approach in considering adjustments to the stance of monetary policy,” the minutes said.
In December, the Fed lowered its main interest rate by a quarter-point to 4.25-4.5 per cent, one full point lower than they were in September. But officials projected that there would be just two additional cuts in 2025, and the US central bank might pause its cycle of rate cuts at its meeting later this month.
Fed officials’ caution about future rate cuts is driven by wariness about the US inflation outlook, given concern among economists that Trump’s plan for tariffs, tax cuts and immigration could speed up price rises again.
According to the minutes, Fed officials believed the “likelihood that elevated inflation could be more persistent had increased” — and was a central risk to the outlook.
“Participants expected that inflation would continue to move toward 2 per cent, although they noted that recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated”, the minutes said.
However, some officials have signalled they still expect US monetary policy to be loosened fairly aggressively, and dismissed the concerns about the impact of tariffs.
“I will support continuing to cut our policy rate in 2025,” Christopher Waller, a Fed governor, said in remarks at the OECD in Paris on Wednesday, adding that he did not expect tariffs to have a “significant or persistent” impact on inflation.
“The extent of further easing will depend on what the data tell us about progress toward 2 per cent inflation, but my bottom-line message is that I believe more cuts will be appropriate,” he said, referring to the Fed’s inflation target.
US government bond markets were little changed following the release of the minutes, with the two-year Treasury yield flat at 4.29 per cent and the benchmark 10-year yield up 0.01 percentage point at 4.7 per cent.
In equity markets, the S&P 500 closed 0.2 per cent higher. Following Wednesday’s minutes, investors were betting that the central bank would deliver the year’s first quarter-point rate cut by July, in keeping with pricing earlier in the day.
